In spite of concerns about low interest rates and depressed markets, State Street (NYSE:STT) reported net income for the third quarter of $543 million, or $1.10 per share, compared to $1.00 a share in the second quarter and $1.08 a share last year.  The company posted revenues of $2.4 billion, which declined 2.5% sequentially but rose 5% over the prior year period. These strong results led to a 6% rise in the stock price on Tuesday. Gains from cost management efforts and an increase in foreign exchange trading were somewhat offset by weak equity markets and reduced securities finance revenues. Competitors BNY Mellon (NYSE:BK) and JPMorgan Chase (NYSE:JPM) announced their third quarter earnings earlier this week.
We are reviewing our $46 price estimate for State Street to reflect market conditions and third quarter earnings.
Depressed equity markets and economic environment strain revenues
The company reported a 2% sequential decline in servicing fee revenues owing to reduced average equity values. Revenues from asset management also fell by 8% on account of weaker valuations. Low interest rates pressured the company’s net interest margins, but net interest revenue was up slightly from Q2 due to an increase in client deposits.
Though revenues from foreign currency trading benefited from market volatility (leading to higher volumes), a decline of approximately 38% in securities finance, attributed to seasonal fluctuations, led to the sequential decline in revenues.
Business operations and IT transformation program delivers effective cost savings
The company’s expenses declined primarily because of the successful implementation of its business and information technology program. According to company estimates, the program resulted in approximately $18 million of cost savings in Q3. These effective cost reductions allowed profitability to improve despite the sequential revenue decline.
The company expects the current macroeconomic environment to extend into the next year, presenting challenges in the form of stricter regulation, continued weakness in the markets and persisting low interest rates. In the future, management plans to focus on improving the core business and achieving operational efficiency by further reducing expenses.Notes:
- State Street Reports EPS of $1.10 for the Third Quarter of 2011 up 10% Compared to the Second Quarter of 2011, State Street Press Release [↩]